Question

The balance sheet and income statement shown below are for Byrd Inc.

BALANCE SHEET

Cash $ 140.0 Accounts payable $800.0

Accts. Receivable 880.0 Notes payable ` 600.0

Inventories 1,320.0 Accruals 400.0

Total current assets 2,340.0 Total current liabilities 1,800.0

Long-term bonds 1,000.0

Total debt 2,800.0

Common stock 200.0 (50,000 shares)

Retained earnings 1,000.0

Net plant & equip 1,660.0 Total common equity 1,200.0

Total assets $4,000.0 Total liabilities & equity $4,000.0

INCOME STATEMENT

Net sales $6,000.0

Operating costs 5,599.8

Depreciation 100.2

EBIT $ 300.0

Less: Interest 96.0

EBT $ 204.0

Less: Taxes 81.6

Net income $ 122.4

Account balances in financial statements are in thousands.

Required:

a) Construct the DuPont Identity and explain its significance.

b) Calculate the earnings per share and explain its significance.

c) Calculate the current ratio and explain its significance.

d) Calculate the inventory holding period and explain its significance.

Answer 1

a. DuPont Identity shows that the company's Return on Equity (ROE) can be represented as a product of three ratios i.e. Net Profit Margin, Asset Efficiency, and Equity Multiplier. It allows the investor to know which financial activities are contributing the most to the changes in ROE.
DuPont Identity = Net Profit Margin * Asset Efficiency * Equity Multiplier
= Profit / Sales * Sales / Assets * Assets/ Equity
= 122.4 / 6000 * 6000 / 4000 * 4000 / 1200
= 0.0204 * 1.5 * 3.334
= 0.102

b. Earnings per Share indicated the profitability of the company per unit of shareholder's ownership. It represents portion of company's earnings, net of taxes and preferred dividends, that is allocated to each share of common stock.
EPS = Net Income / No. of outstanding shares
= 122.4 / 50000
= 0.0024

c. The Current Ratio is the liquidity ratio which measures fir,s' ability to pay off its short-term liabilities with current assets. It helps the investors and creditors to understand the liquidity of the company and how easily can a company pay off its short term liabilities. Higher the ratio better it is.
Current Ratio = Current Assets / Current Liabilities
= 2340 / 1800
= 1.3

d. Inventory Holding period shows the no. of days on an average company hold its inventory before it is sold. It allows management to understand its movement of inventory to reduce the inventory carrying cost. It also helps the firms to understand which products are selling fast and which are stagnant. Thus, it is an important efficiency measure of converting goods into sales. Lower the ratio better it is, because it means products are selling at faster rate.
Inventory Holding period = Inventory / Cost of sales *365
= 1320 / 5599.8 * 365
= 0.236 * 365
= 86.14 i.e 86 days approximately.